FIN 370 Johnson & Johnson\DQ 4week 2
The time value of money is an important component of the managerial finance especially in the financial management. The concept and the logic behind the idea is that as the time passes money tends to lose the value and its purchasing power. For example the value of a dollar today will be say $.90, $.85 two years later and so on. So if you want to have the same value of $1 in the current terms one year later how much dollars will you earn? This is where the time value of money becomes important.
The important of the time value of money is that it helps in determining the present and the future value of money. We will explain in detail both of these concepts.
The future value of money is value of the cash or an asset that has to receive or paid at specific future date compounded at company interest rate or the cost of capital that is equal to the sum specified today. Let us suppose that we have $10000 and we want to invest it in a venture with a bank and the bank will pay us 11% per annum on the invested amount. The period of the venture is for 5 years. How much will we have at the end of the venture?